How the world's most indebted Government can raise €5Bn per year & pay down debt, without raising taxes

Stone broke

How things have changed! Last year it was known as the Celtic Tiger. Now it's a sickly creature living on borrowed time. Ireland is, according to figures published by the Irish central tatistics office (CSO), the world's most indebted country, as a proportion of GDP. The government has an urgent need to replace a sudden and severe loss of revenue from income tax, VAT & property transaction taxes. Various measures have been proposed , mostly focussing on sharp increases in income & property taxes. This may help to rebalance public finances in the short-term but also risk a further sharp contraction in consumer confidence and economic activity, with further weakening of state finances in due course.

Reliving the past

In previous economic cycles elevated income taxes have coincided with reduced consumption, severe loss of confidence, recession, unemployment and emigration. There is a real danger Ireland will return to past failures if measures to repair government finances rely exclusively on higher taxation. Alternative sources of potential income can stimulate economic activity and help to restore confidence while making a big contribution to state finances. The Irish state still controls an unusually large slice of economic activity through state owned enterprises. Some of the state companies are very efficient but many have substantial scope for improvement. Some, e.g. ESB, are happy to rely on state support when it suits them while exploiting private sector status, e.g. in respect to national wage agreements.

Other options

The Irish state directly controls saleable commercial assets worth at least €25Bn and probably much more dependent on timing and conditions of sale. Many of these assets could be sold with significant cash receipts being realised by the state within 12-24 months, even in the current turbulent markets. Indeed past experience in countries such as the UK suggests that the privatisation process can itself be a significant contributor to restoring confidence. Large-scale privatisations in the UK began at a time of recession in the early 1980’s and contributed significantly to a sense of optimism and revival from the mid 80’s onwards. Ireland has the opportunity to exploit many of the same gains while adapting the sale process to Irish circumstances.

Learning the lessons of history

Privatisation is associated with mistakes and poor timing, particularly in relation to the Eircom sale which left many Irish consumers and taxpayers feeling cheated. In large part this arose because of the competing objectives of maximising sales proceeds for the state while delivering a compelling investment proposition for the general public. The Eircom sale largely succeeded in the first objective while it failed on the second point. Investors were left nursing losses as the financial markets marked down the value of shares which investors bought in expectation of future gains. Privatisation in the current climate might have a better outcome for private investors over the medium-longer term but there is unlikely to much public enthusiasm. A better course of action might be for the state to retain a significant share in any enterprise being sold, while unambiguously seeking to achieve the highest price possible for shares sold. The public would benefit in terms of enhanced value for the shares retained in state ownership and less onerous tax increases to finance the public deficit. A proportion of shares would probably have to be reserved for employees of each enterprise but this should be balanced by provisions for long-term funding of pension obligations and restructuring costs.

How much & how fast?

There is a vast pool of assets, land and resources owned directly or indirectly by the state. Fig 1, below, contains a list of state assets which could be sold totally or in part with the prospect of raising up to approximately €25Bn over a 3-5 year period.
It is likely that the sale process would have a stimulatory effect on the national economy, quite apart from the direct cash inflow, in particular helping to restore confidence. Some of the proposals would serve as catalysts for further investment, creating employment, generating revenue and taxes.

Fig 1. 10 cash-generating proposals for the Irish government;

Privatisation candidates

1. Sell Eirgrid, €2-2.5Bn
2. Sell Dublin airport, €2-3Bn
3. Sell Dublin Port Company, €2.75-3.5Bn.
4. Sell publicly owned motorways & bridges financed on time-limited rights to new
tolls. €2-3Bn.
5. Sell Cork & Shannon airports, €750-€1.25Bn
6. Sell RTE €1bn
7. Sell ESB, €5Bn
8. Sell Bord Gais €4-5Bn
9. Sell Bord na Mona €1-€1.5bn
10. Sell State forests €750+mn

Net cash income for state c. €4-5Bn p.a.


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